It requires a detailed physical count so that the company knows exactly how many of each good bought on specific dates comprise the year-end inventory.
In theory, this method is considered the most accurate since it directly relates the ending inventory goods to the specific price they were bought for.
Alternatively, management could choose to report lower income to reduce the taxes they are required to pay.
For example, relating shipping and storage costs to a specific inventory item becomes difficult.
Thus, this method is generally limited to large, high-ticket items which can be easily identified specifically (such as tract houses).